Jaindi Kisero
20 June 2005
Nairobi — Vodafone, the giant British mobile phone company, could soon take a controlling share of Safaricom - the largest cellular phone company in East Africa.
Confidential documents obtained by The EastAfrican reveal that, away from the limelight, Vodafone - one of the biggest mobile phone companies in the world - has quietly placed a cash offer of a whopping Ksh 7.7 billion ($100 million) on the table for an additional 11 per cent stake in Safaricom.
The size of the offer means that Vodafone - which already controls the management of the company under a 1999 shareholders' agreement and, therefore, has an insider's understanding of its financial strength - is stipulating an enterprise value of nearly $1 billion for 100 per cent of the company.
The fact that Safaricom has in five years grown into a billion-dollar company is one of the sensational revelations of the transaction - given that the company itself has done little to advertise the fact.
If the government accepts the offer, the transaction will not only be Kenya's largest privatisation deal ever, but also the single-biggest inflow of foreign direct investment into the country in recent years.
Well-placed sources told The EastAfrican that the offer by Vodafone has been sitting on Finance Minister David Mwiraria's table for the past three months.
With neither the minister nor Vodafone willing to comment publicly on the matter, it is also not clear whether the government has officially responded to the offer or even given a counter offer.
The government, through Telkom Kenya, indirectly owns 60 per cent of Safaricom, meaning that, in the event that the proposal is accepted, the British company will immediately assume a 51 per cent shareholding in the company, permitting it to consolidate its control over what is by far the strongest brand in the mobile telephone market in East Africa.
Details of the offer are still scanty, but The EastAfrican has confirmed that the proposal by the British investor stipulates that:
* Vodafone pays the $100 million in cash to the government;
* Vodafone gives an undertaking that it will support a listing on the Nairobi Stock Exchange of the 49 per cent shares that remain in the hands of the government;
* Part of the proceeds of the deal will be used to clear debts that Telkom Kenya owes Safaricom in respect of an interconnect agreement between the parties; and
* A new shareholders' agreement will be signed between the two parties to reflect the changed shareholding structure.
There appears to be little reason for Mr Mwiraria to turn down the offer considering that the government badly needs the cash to finance the ongoing restructuring of Telkom Kenya.
Early this year, it contracted a consortium of consultants, led by audit firm PKF Consulting, to study the financial affairs of Telkom and advise on how the perennially loss-making parastatal can be restructured.
Although PKF is still at work, the projections are that billions of shillings will have to be spent on paying off hundreds of Telkom Kenya employees, especially the cadres the consultant singles out for retrenchment.
On the face of it, and in light of the scanty details on the proposal so far, the offer by the British investor is attractive in several ways.
In the first place, it will provide Telkom Kenya with a $100 million cash injection to strengthen its balance sheet, enabling the cash-strapped parastatal to reduce its outstanding debts, including obligations to the government and tax authorities.
And with the controlling shareholding in the company shifting from Telkom to Vodafone, the local company will immediately graduate to the league of companies with access to international capital markets. It will then be able to refinance its debts portfolio and declare dividends for all shareholders, including Telkom.
The undertaking Vodafone has made to support an initial public offering (IPO) of Safaricom shares remaining in the hands of Telkom, should also be attractive to the government.
Under the shareholders' agreement, Vodafone has pre-emptive rights over the shares of Safaricom Ltd, meaning that the government cannot sell the shares of the company without the consent of its joint-venture partner.
With the foreign investor having given an undertaking that it will waive its pre-emptive rights, the government now has a window through which it can make it possible for ordinary citizens to own shares of the profitable company.
Indeed, what is planned will by far be the biggest IPO ever witnessed on the Nairobi Stock Exchange. The big question is whether the NSE as it is presently constituted has the capacity to absorb an IPO of even 25 per cent shares of Safaricom: which, going by the value of the proposed deal, works out at $250 million (Ksh19.2 billion).
Nevertheless, investment bankers and stockbrokers will be salivating at the prospect of clinching the contract for advisory services for such an IPO.
A capital markets analyst told The EastAfrican the size of the transaction may indeed require that the issue be designed to allow the shares to be sold throughout the region, making it the first East African IPO.
According to Safaricom's audited financial statements, revenues from mobile cellular services have increased sharply over the past four years, from Ksh2 billion ($25.9 million) in 2000/2001 to Ksh18.8 billion ($244 million) in 2003/2004.
The growth is mainly attributable to the increase in effective connections from 54,000 lines to more than 2.5 million lines over the period.
Profit before tax has increased from Ksh3.1 billion ($40.2 million) in 2003 to Ksh5.1 billion (66.2 million) last year.
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